Monday, March 21, 2011

Innovation becomes the safe strategy

I was thinking recently that one of the biggest barriers to innovation is the fear of change. Most businesses are very comfortable operating in markets and interacting with customers that they understand. Changing the parameters of the market, the customers or prospects you work with or the products that you offer risks disrupting the relationships that exist. In this line of thinking, therefore, the least amount of change applied creates the greatest amount of certainty.

I wonder if there is a greater fallacy enacted on corporate management and individual stockholders anywhere else in the business world than this one - that it is safer and more responsible to operate a business as if the markets, regulations, competition and environment is not changing, and therefore investments in new ideas, or exploration of new markets is not as important as maintaining the "core" business.

Today, March 2011, it seems that everything is changing. We worry about our environment with the advent of climate change. We worry about Europe and its increasing debt levels in countries like Spain and Portugal, nevermind Greece and Ireland. We worry about the changing relationship between the US and China, as China seems poised to become the largest economy in the world, which will allow it to direct more of the market than it has previously. We ignore at our own peril a rising debt level in this country that must be repaid to foreign interests. Yet in the midst of this many executives will argue that it is innovation that is the risky investment, instead trusting in a stay-the-course management style.

I suppose "stay the course" is reasonable in an environment where little changes, and customers don't have other options. In that kind of market you can generate profits by sustaining existing products and services and constantly cutting costs. But in a market where regulations change, competitors change and customer tastes change, stay the course seems to me to be the most risky option. A business must be at least as nimble as its customers and competitors in an era of change. Locking into a stay the course mentality and refusing to innovate when your environment is rapidly changing seems to be the risky strategy.

As usual, we've reached a point of diminishing returns. A cutting costs, ever more efficient and effective business strategy works well when markets are protected, regulations don't change and customers have little freedom or choice. In a market where all of these factors are no longer true, businesses that are nimble, agile and pursue innovation will have the upper hand. Innovation, once the poster child for risky strategic thinking, will rapidly become the safe strategic choice.

If innovation is the safe strategy, then everything about your operating model needs to change. We need to shift the dynamics of the firm from safe, "reasonable" slow change to identification of new opportunities and new customers. We need to shift rewards from cost cutting to introduction of new products and services. We need to change what we measure and reward. Or, failing these actions, you can lock down your existing way of doing business and ride out the storm, since certainly all of these market, regulatory and competitive changes will pass, and the pendulum will swing back into static equilibrium.

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5 Comments:

I think the difference here is that not innovating is emotionally safe, whereas in today's market conditions it isn't financially safe. Today's top executives have an emotional investment in the strategies, tactics, processes and products that are currently in place in their organisation (or those of the past because of the time it has taken them to get to where they are). We need to understand that the rhetoric of "innovation is risky" is often - though not always - just a rationalisation of that avoidance of emotional risk rather than a good business justification.

I think it is a mistake to simply ignore changes in your industry and business to play it safe. My company recognized that some customers' needs had changed and that they (the price and convenience seekers) needed standard products with no frills at market prices. Since that wasn't the business Dow Corning was in, they created XIAMETER to meet those needs. I can understand though why it might be difficult for businesses to take the risky route. We couldn't have done it without top level support from the get-go.

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